##### Table of Contents



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 
 FORM 10-Q
 
 þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2006.
 OR
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934FOR THE TRANSITION
PERIOD FROM
 TO
 Commission file number: 0-22187
 RENAISSANCE LEARNING, INC.
  Wisconsin
(State or other
jurisdiction of incorporation)
    
    39-1559474
(I.R.S. Employer
Identification No.)
 2911 Peach Street
P.O. Box 8036
Wisconsin Rapids, Wisconsin
 54495-8036
 (715) 424-3636
 þ o
  o þ o
 o þ
  Class
    
    Outstanding at
April 28, 2006Common Stock, $0.01 par value
    
    30,087,763




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##### 



RENAISSANCE LEARNING, INC.
 INDEX TO FORM 10-Q
 FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2006
 PagePART I  FINANCIAL INFORMATIONItem 1. Financial StatementsCondensed Consolidated Balance Sheets at March 31, 2006
and December 31, 2005
    
    1Condensed Consolidated Statements of Income for the Three Months
Ended March 31, 2006 and 2005
    
    2Condensed Consolidated Statements of Cash Flows for the Three Months
Ended March 31, 2006 and 2005
    
    3Notes to Condensed Consolidated Financial Statements
    
    4Item 2. Managements Discussion and Analysis of Financial
Condition and Results of Operations
    
    7Item 3. Quantitative and Qualitative Disclosures About
Market Risk
    
    10Item 4. Controls and Procedures
    
    11PART II  OTHER INFORMATIONItem 1A. Risk Factors
    
    11Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    11Item 4. Submission of Matters to a Vote of Security Holders
    
    12Item 6. Exhibits
    
    13CertificationCertificationCertificationCertification




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##### Table of Contents



PART I  FINANCIAL INFORMATION
 
 Item 1. Financial Statements
 RENAISSANCE LEARNING, INC. AND SUBSIDIARIES
 
 CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited)
 March 31,
    
    
    December 31,2006
    
    
    2005(In Thousands, Except Share and Per Share Amounts)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    5,900
    
    
    $
    7,083Investment securities
    
    
    20,664
    
    
    
    23,363Accounts receivable, less allowances of $1,390 and $1,340, respectively
    
    
    11,759
    
    
    
    11,393Inventories
    
    
    3,442
    
    
    
    4,138Prepaid expenses
    
    
    1,786
    
    
    
    1,722Deferred tax asset
    
    
    3,988
    
    
    
    3,693Other current assets
    
    
    270
    
    
    
    390Total current assets
    
    
    47,809
    
    
    
    51,782Investment securities
    
    
    2,814
    
    
    
    4,132Property, plant and equipment, net
    
    
    11,432
    
    
    
    11,475Deferred tax asset
    
    
    242
    
    
    
    738Goodwill
    
    
    46,101
    
    
    
    45,906Other intangibles, net
    
    
    6,605
    
    
    
    6,787Capitalized software, net
    
    
    299
    
    
    
    420Other receivables
    
    
    5,863
    
    
    
    5,909Other non-current assets
    
    
    1,334
    
    
    
    1,233Total assets
    
    $
    122,499
    
    
    $
    128,382LIABILITIES AND SHAREHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    3,544
    
    
    $
    3,280Deferred revenue
    
    
    15,753
    
    
    
    18,255Payroll and employee benefits
    
    
    4,073
    
    
    
    4,156Income taxes payable
    
    
    1,120
    
    
    
    313Other current liabilities
    
    
    3,771
    
    
    
    4,239Total current liabilities
    
    
    28,261
    
    
    
    30,243Deferred revenue
    
    
    543
    
    
    
    670Deferred compensation and other employee benefits
    
    
    2,219
    
    
    
    1,603Total liabilities
    
    
    31,023
    
    
    
    32,516Shareholders equity:Common stock, $.01 par; shares authorized: 150,000,000;
issued: 34,736,647 shares at March 31, 2006 and December 31, 2005
    
    
    347
    
    
    
    347Additional paid-in capital
    
    
    55,906
    
    
    
    56,522Retained earnings
    
    
    120,206
    
    
    
    118,233Treasury stock, at cost 4,703,899 shares at March 31, 2006;
4,387,594 shares at December 31, 2005
    
    
    (84,561
    )
    
    
    (78,845
    )Unearned restricted stock compensation
    
    
    (475
    )
    
    
    (438
    )Accumulated other comprehensive income
    
    
    53
    
    
    
    47Total shareholders equity
    
    
    91,476
    
    
    
    95,866Total liabilities and shareholders equity
    
    $
    122,499
    
    
    $
    128,382
  -1-




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RENAISSANCE LEARNING, INC. AND SUBSIDIARIES
 
 CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(unaudited)
 Three MonthsEnded March 31,2006
    
    
    2005(In Thousands, Except Per Share Amounts)Net sales:Products
    
    $
    25,323
    
    
    $
    21,126Services
    
    
    5,794
    
    
    
    6,431Total net sales
    
    
    31,117
    
    
    
    27,557Cost of sales:Products
    
    
    4,328
    
    
    
    1,189Services
    
    
    2,806
    
    
    
    2,760Total cost of sales
    
    
    7,134
    
    
    
    3,949Gross profit
    
    
    23,983
    
    
    
    23,608Operating expenses:Product development
    
    
    4,182
    
    
    
    3,618Selling and marketing
    
    
    9,356
    
    
    
    8,045General and administrative
    
    
    5,205
    
    
    
    3,069Total operating expenses
    
    
    18,743
    
    
    
    14,732Operating income
    
    
    5,240
    
    
    
    8,876Other income, net
    
    
    282
    
    
    
    456Income  continuing operations before income taxes
    
    
    5,522
    
    
    
    9,332Income taxes  continuing operations
    
    
    2,043
    
    
    
    3,453Income  continuing operations
    
    
    3,479
    
    
    
    5,879Income on discontinued operations,
net of tax benefit of $1,417 for the three months
ended March 31, 2005
    
    
    
    
    
    
    584Net income
    
    $
    3,479
    
    
    $
    6,463Earnings per share:Basic:Continuing operations
    
    $
    0.12
    
    
    $
    0.19Discontinued operations
    
    
    0.00
    
    
    
    0.02Net income
    
    $
    0.12
    
    
    $
    0.21Diluted:Continuing operations
    
    $
    0.12
    
    
    $
    0.19Discontinued operations
    
    
    0.00
    
    
    
    0.02Net income
    
    $
    0.12
    
    
    $
    0.21Cash dividends declared per share
    
    $
    0.05
    
    
    $
    0.05
  -2-




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RENAISSANCE LEARNING, INC. AND SUBSIDIARIES
 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
 For the Three Months EndedMarch 31,2006
    
    
    2005(In Thousands)Reconciliation of net income to net cash provided by operating activities:Net income
    
    $
    3,479
    
    
    $
    6,463(Income) from discontinued operations
    
    
    
    
    
    
    (584
    )Income from continuing operations
    
    
    3,479
    
    
    
    5,879Noncash
(income) expenses included in net income -
Depreciation and amortization
    
    
    895
    
    
    
    745Amortization of investment discounts/premiums
    
    
    58
    
    
    
    132Deferred income taxes
    
    
    154
    
    
    
    95Change in assets and liabilities, excluding the effects of acquisitions and divestituresAccounts receivable
    
    
    (402
    )
    
    
    81Inventories
    
    
    683
    
    
    
    158Prepaid expenses
    
    
    (65
    )
    
    
    56Accounts payable and other liabilities
    
    
    1,050
    
    
    
    1,799Deferred revenue
    
    
    (2,629
    )
    
    
    (1,450
    )Income tax benefit from employee stock options
    
    
    393
    
    
    
    10Other current assets
    
    
    120
    
    
    
    51Other
    
    
    92
    
    
    
    106Cash provided by continuing operating activities
    
    
    3,828
    
    
    
    7,662Cash used by discontinued operations
    
    
    
    
    
    
    (116
    )Net cash provided by operating activities
    
    
    3,828
    
    
    
    7,546Cash flows from investing activities:Purchase of property, plant and equipment
    
    
    (553
    )
    
    
    (456
    )Purchase of investment securities
    
    
    (222
    )
    
    
    (95
    )Maturities/sales of investment securities
    
    
    4,180
    
    
    
    9,768Net proceeds from sale of subsidiary
    
    
    
    
    
    
    75Net cash provided by investing activities
    
    
    3,405
    
    
    
    9,292Cash flows from financing activities:Proceeds from exercise of stock options
    
    
    16
    
    
    
    504Payment for cancellation of stock options
    
    
    (993
    )
    
    
    Dividends paid
    
    
    (1,505
    )
    
    
    (1,541
    )Purchase of treasury stock
    
    
    (5,934
    )
    
    
    (3,921
    )Net cash (used by) financing activities
    
    
    (8,416
    )
    
    
    (4,958
    )Net (decrease) increase in cash and cash equivalents
    
    
    (1,183
    )
    
    
    11,880Cash and cash equivalents, beginning of period
    
    
    7,083
    
    
    
    27,460Cash and cash equivalents, end of period
    
    $
    5,900
    
    
    $
    39,340
  -3-




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##### Table of Contents



RENAISSANCE LEARNING, INC. AND SUBSIDIARIES
 
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
 1. Consolidation
  2. Basis of Presentation
   3. Earnings Per Common Share
    Three Months EndedMarch 31,2006
    
    
    2005Basic weighted average shares outstanding
    
    
    30,144,940
    
    
    
    30,816,536Dilutive effect of outstanding stock options
    
    
    21,055
    
    
    
    41,757Diluted weighted average shares outstanding
    
    
    30,165,995
    
    
    
    30,858,293
  -4-




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##### Table of Contents



4. Comprehensive Income
  5. Goodwill and Other Intangible Assets
    March 31, 2006
    
    
    December 31, 2005Gross
    
    
    Accumulated
    
    
    
    
    
    
    Gross
    
    
    AccumulatedAmount
    
    
    Amortization
    
    
    Net
    
    
    Amount
    
    
    Amortization
    
    
    NetTradename
    
    $
    3,000
    
    
    $
    
    
    
    $
    3,000
    
    
    $
    3,000
    
    
    $
    
    
    
    $
    3,000Customer relationships
    
    
    4,150
    
    
    
    545
    
    
    
    3,605
    
    
    
    4,150
    
    
    
    363
    
    
    
    3,787$
    7,150
    
    
    $
    545
    
    
    $
    6,605
    
    
    $
    7,150
    
    
    $
    363
    
    
    $
    6,787
 6. Stock Based Compensation
  Three Months EndedMarch 31,2005(In thousands, except per share amounts)Net Income, as reported
    
    $
    6,463Deduct: Total stock-based compensation
expense determined under fair-value based
method for all awards, net of tax
    
    
    248Pro forma net income
    
    $
    6,215Earnings per share:Basic as reported
    
    $
    0.21Basic pro forma
    
    $
    0.20Diluted as reported
    
    $
    0.21Diluted pro forma
    
    $
    0.20
  -5-




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##### Table of Contents



7. Dividends
  8. Business Combinations
   Three MonthsEnded(In thousands, except per share amounts)
    
    March 31, 2005Net sales
    
    $
    34,541Income from continuing operations
    
    
    4,505Earnings per share form continuing operationsBasic earnings per share
    
    
    0.14Diluted earnings per share
    
    
    0.14
 -6-




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##### Table of Contents



Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
 Results of Operations
     Three Months Ended March 31,2006
    
    
    2005
    
    
    Change(Dollars In Thousands)Net Sales:Products
    
    $
    25,323
    
    
    
    81.4
    %
    
    $
    21,126
    
    
    
    76.7
    %
    
    $
    4,197
    
    
    
    19.9
    %Services
    
    
    5,794
    
    
    
    18.6
    %
    
    
    6,431
    
    
    
    23.3
    %
    
    
    (637
    )
    
    
    -9.9
    %Total net sales
    
    
    31,117
    
    
    
    100.0
    %
    
    
    27,557
    
    
    
    100.0
    %
    
    
    3,560
    
    
    
    12.9
    %Cost of sales:Products
    
    
    4,328
    
    
    
    17.1
    %
    
    
    1,189
    
    
    
    5.6
    %
    
    
    3,139
    
    
    
    264.0
    %Services
    
    
    2,806
    
    
    
    48.4
    %
    
    
    2,760
    
    
    
    42.9
    %
    
    
    46
    
    
    
    1.7
    %Total cost of sales
    
    
    7,134
    
    
    
    22.9
    %
    
    
    3,949
    
    
    
    14.3
    %
    
    
    3,185
    
    
    
    80.7
    %Gross profit:Products
    
    
    20,995
    
    
    
    82.9
    %
    
    
    19,937
    
    
    
    94.4
    %
    
    
    1,058
    
    
    
    5.3
    %Services
    
    
    2,988
    
    
    
    51.6
    %
    
    
    3,671
    
    
    
    57.1
    %
    
    
    (683
    )
    
    
    -18.6
    %Total gross profit
    
    
    23,983
    
    
    
    77.1
    %
    
    
    23,608
    
    
    
    85.7
    %
    
    
    375
    
    
    
    1.6
    %Operating expenses:Product development
    
    
    4,182
    
    
    
    13.4
    %
    
    
    3,618
    
    
    
    13.1
    %
    
    
    564
    
    
    
    15.6
    %Selling and marketing
    
    
    9,356
    
    
    
    30.0
    %
    
    
    8,045
    
    
    
    29.2
    %
    
    
    1,311
    
    
    
    16.3
    %General and administrative
    
    
    5,205
    
    
    
    16.7
    %
    
    
    3,069
    
    
    
    11.1
    %
    
    
    2,136
    
    
    
    69.6
    %Total operating expenses
    
    
    18,743
    
    
    
    60.1
    %
    
    
    14,732
    
    
    
    53.4
    %
    
    
    4,011
    
    
    
    27.2
    %Operating income
    
    
    5,240
    
    
    
    16.8
    %
    
    
    8,876
    
    
    
    32.2
    %
    
    
    (3,636
    )
    
    
    -41.0
    %Other, net
    
    
    282
    
    
    
    0.9
    %
    
    
    456
    
    
    
    1.7
    %
    
    
    (174
    )
    
    
    -38.2
    %Income  continuing operations
before income taxes
    
    
    5,522
    
    
    
    17.7
    %
    
    
    9,332
    
    
    
    33.9
    %
    
    
    (3,810
    )
    
    
    -40.8
    %Income taxes  continuing operations
    
    
    2,043
    
    
    
    6.6
    %
    
    
    3,453
    
    
    
    12.5
    %
    
    
    (1,410
    )
    
    
    -40.8
    %Income  continuing operations
    
    
    3,479
    
    
    
    11.2
    %
    
    
    5,879
    
    
    
    21.3
    %
    
    
    (2,400
    )
    
    
    -40.8
    %Income on discontinued operations
net of tax benefit of $1,417 in 2005
    
    
    
    
    
    
    0.0
    %
    
    
    584
    
    
    
    2.1
    %
    
    
    (584
    )
    
    
    -100.0
    %Net income
    
    $
    3,479
    
    
    
    11.2
    %
    
    $
    6,463
    
    
    
    23.5
    %
    
    
    ($2,984
    )
    
    
    -46.2
    %
 -7-




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Three Months Ended March 31, 2006 and 2005
 Net Sales AlphaSmart
  Cost of Sales
  Product Development
 Selling and Marketing
 General and Administrative
 Operating Income
 Income Tax Expense  Continuing Operations
 
 ®
 -8-




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##### Table of Contents



Liquidity and Capital Resources
    Off-Balance Sheet Arrangements and Aggregate Contractual Obligations
  Operating Leases.
 Purchase Obligations. AlphaSmart AccelScan Renaissance Classroom Response System
  Contractual Obligations
    
    Payments due by Period(In thousands)
    
    Total
    
    
    Less than
    
    
    1- 3 years
    
    
    3-5 years
    
    
    More than1 year
    
    
    
    
    
    
    
    
    
    
    5 yearsOperating lease obligations
    
    $
    3,353
    
    
    $
    740
    
    
    $
    2,124
    
    
    $
    489
    
    
    $
    Purchase obligations
    
    
    4,250
    
    
    
    3,824
    
    
    
    426
    
    
    
    
    
    
    
    Total
    
    $
    7,603
    
    
    $
    4,564
    
    
    $
    2,550
    
    
    $
    489
    
    
    $
    
 Critical Accounting Policies and Estimates
  -9-




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##### Table of Contents



Forward-Looking Statements
 Risk Factors
 
 Item 3. Quantitative and Qualitative Disclosures About Market Risk
 Interest Rate Risk
 Market Risk.
   Foreign Currency Exchange Rate Risk.
 -10-




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##### Table of Contents



Item 4. Controls and Procedures
    
 Part II  OTHER INFORMATION
 
 Item 1A. Risk Factors
  
 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
   MaximumTotal Number of
    
    
    Number of SharesShares Purchased as
    
    
    that May Yet BeTotal Number of
    
    
    
    
    
    
    Part of Publicly
    
    
    Purchased UnderShares
    
    
    Average Price
    
    
    Announced Plans or
    
    
    the Plans orPeriod
    
    Purchased
    
    
    Paid per Share
    
    
    Programs
    
    
    ProgramsJanuary 1-31, 2006
    
    
    102,000
    
    
    $
    19.31
    
    
    
    102,000
    
    
    
    1,748,527February 1-28, 2006
    
    
    144,400
    
    
    
    17.36
    
    
    
    144,400
    
    
    
    1,604,127March 1-31, 2006
    
    
    82,072
    
    
    
    17.76
    
    
    
    82,072
    
    
    
    1,522,055Total
    
    
    328,472
    
    
    $
    18.07
    
    
    
    328,472
 -11-




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##### Table of Contents



Item 4. Submission of Matters to a Vote of Security Holders
 (a)
    
    On April 19, 2006, the Company held its Annual Meeting of Shareholders.(b)
    
    Not applicable.(c)
    
    Set forth below is a description of the matter voted upon at the Annual Meeting of
Shareholders and the number of votes cast for and against/withheld, as to such matter.
 1.
    
    Seven directors were elected to serve until the 2007 Annual Meeting of Shareholders and
until their successors are elected and qualified. The results of this proposal are as
follows:
 Against/For
    
    Withheld(1) Judith A. Paul
    
    
    29,373,247
    
    
    
    29,076(2) Terrance D. Paul
    
    
    29,373,962
    
    
    
    28,361(3) John H. Grunewald
    
    
    29,299,509
    
    
    
    102,814(4) Gordon H. Gunnlaugsson
    
    
    29,343,290
    
    
    
    59,033(5) Harold E. Jordan
    
    
    29,343,250
    
    
    
    59,073(6) Addison L. Piper
    
    
    29,245,042
    
    
    
    157,281(7) Judith A. Ryan
    
    
    29,344,385
    
    
    
    57,938
 (d)
    
    Not applicable. -12-




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##### Table of Contents



Item 6. Exhibits
  Exhibit No.
    
    Description10.1
    
    Terms of Steven A. Schmidts Employment dated April 10, 2006 (1)10.2
    
    Form of Confidentiality Agreement between Registrant and Employees (1)10.3
    
    Form of Non-Compete Agreement between Registrant and Employees (1)31.1
    
    Section 302 certification by Terrance D. Paul31.2
    
    Section 302 certification by Mary T. Minch32.1
    
    Section 906 certification by Terrance D. Paul32.2
    
    Section 906 certification by Mary T. Minch
 
 (1)
    
    Incorporated by reference to Registrants Form 8-K dated April 11, 2006 (SEC File No.
0-22187) -13-




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##### Table of Contents



SIGNATURES
  RENAISSANCE LEARNING, INC.
(Registrant)May 5, 2006
    /s/ Terrance D. PaulDate
    Terrance D. PaulChief Executive Officer and a
Director
(Principal Executive Officer) May 5, 2006
    /s/ Mary T. MinchDate
    Mary T. MinchVice President-Finance, Chief
Financial Officer and Secretary
(Principal Financial and Accounting Officer)




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##### Table of Contents



Exhibit No.
    
    Description10.1
    
    Terms of Steven A. Schmidts Employment dated April 10, 2006 (1)10.2
    
    Form of Confidentiality Agreement between Registrant and Employees (1)10.3
    
    Form of Non-Compete Agreement between Registrant and Employees (1)31.1
    
    Section 302 certification by Terrance D. Paul31.2
    
    Section 302 certification by Mary T. Minch32.1
    
    Section 906 certification by Terrance D. Paul32.2
    
    Section 906 certification by Mary T. Minch
 
 (1)
    
    Incorporated by reference to Registrants Form 8-K dated April 11, 2006 (SEC File No. 0-22187)